CORPORATE GOVERNANCE REFORM: INFLUENCE ON SHAREHOLDER WEALTH Richard w: Pouder R. Stephen Cantrell Clemson University Clemson, SC Abstract Many corporations have adopted governance practices advocated by shareholder activists. To date, the net effect of such practices is largely un- known. Both practitioners and academics agree that additional research is required to determine whether governance practices have actually improved corporate performance. This paper attempts to resolve some of the uncertain- ties surrounding changes in governance practice. We consider four gover- nance practices widely advocated by shareholder activists and test whether their net and individual effects have an impact on shareholder returns follow- ing layoff announcements. Introduction Over the past two decades, shareholders have become an increasingly vocal and influential force in the governance reform movement. As advocates of gover- nanCe reform, shareholder activists anticipate that certain changes in governance practice will better align their economic interests with those of management. The conceptual platform for the governance reform movement is agency theory. From this perspective, governance changes would be expected to make the board of directors more effective monitors of managements' strategies. As a consequence of improved monitoring, strategies ratified by the board should more closely re- flect shareholder interests and thus increase shareholder wealth. In a recent special issue on governance, Business Week reported that gov- ernance changes have been observed in most major corporations over the past two decades with further changes expected (Byrne, 1997). Four governance changes receiving much attention are: (l) substantially increasing the propor- tion of unaffiliated outside directors, (2) separating the positions of CEO and board chairperson, (3) increasing stock incentives offered to board members, and (4) increasing the proportion of common shares held by institutional in- vestors. Although the proportion of firms separating their CEO and board chair- person has essentially remained constant (Baliga, Moyer, & Rao, 1996), ac- tivists have successfully pressured corporations to adopt each of the other three changes sought. Spring 1999 Pouder & Cantrell: Corporate Governance Reform 49 While significant changes in corporate governance have been adopted as a result ofthe shareholder activist movement, it is not known whether the net effect of these changes actually improves performance. As Business Week asks, "How much is good governance worth? These days, corporate chieftains, shareholder activists, and academics are hotly debating that question" (Byrne, 1997, p. 116). Much of this debate stems from inconsistent research findings concerning the performance implications of governance practices. These inconsistencies are made clear in a recent meta-analysis of board composition, leadership structure, and financial performance by Dalton, Daily, Ellstrand, & Johnson (1998). Their re- sults show little systematic support for relationships between governance ele- ments and financial performance. Most of the arguments noted above are from the point of view of investors and owners. Managers, however, have an interest in good governance as well. From their point of view, if good governance practices are employed, will owners and investors recognize that they are in place and put more faith in managers' decisions? The purpose of this research is to test empirically whether managerial decisions made under conditions of acceptable governance practice are more likely to increase shareholder wealth than managerial decisions that are not. In this study we consider a strategic decision that is inherently controversial: layoffs. Layoffs can be part of a long-range repositioning or downsizing that has strategic merit and will likely result in improved investor wealth. Such is the case in several recent layoffs at Procter and Gamble that were part of a decision to exit certain markets, while repositioning in others. Layoffs can also be part of a myo- pic decision to improve short range operating income that likely decreases share- holder wealth, as evidenced in recent waves oflayoffs made by Eastman Kodak. 1 Assuming that the decision to layoff a portion of the workforce will likely be weighed for strategic value by the stock market, we ask the question: Are firms that employ good governance practices more likely to experience a positive mar- ket reaction to their layoff plans than firms that do not employ good governance practice? To answer this question, we organize the remainder of the paper as fol- lows. First, we discuss governance problems perceived from an agency theory perspective. Second, we use the agency perspective to explain the relationship between governance practices and layoffs. Third, we give a brief account of re- search findings on governance elements, develop hypotheses, and describe our empirical approach. Finally, we present the results and conclude by discussing their implications and limitations. The Role of Governance An Agency Theory Perspective The governance concerns of investors and owners follow from agency theory. Agency theory focuses on the relationship between principals and agents: that is, those who delegate work (principals) and those who perform work for the princi- 50 Journal of Business Strategies Vol. 16, No.1 pals (agents) (Jensen & Meckling, 1976). Casting this relationship as a contract (Jensen & Meckling, 1976), agency theorists examine the problems that can arise between different forms of principal-agent relationships. In the agency theory framework, shareholders in large corporations (principals) hire managers (agents) to initiate and implement important decisions (Fama & Jensen, 1983). However, the risk preferences and interests of shareholders may differ from those of man- agers. Driven by self-interest, managers may choose strategies that increase their compensation over strategies that respond to shareholders' wishes to increase the market value of the firm (Fama & Jensen, 1983). Shareholders will thus seek governance practices that monitor managers' decision making activities. An Agency View of Governance and Layoffs According to agency theory, the board of directors monitors and ratifies strat- egies formulated by management (Fama & Jensen, 1983; Jensen & Meckling, 1976). Although the board rarely formulates strategy (Harrison, 1987; Hoskisson, Johnson, & Moesel, 1994), it reviews strategies to mitigate managerial ineffi- ciencies (Zahra & Pearce, 1989) that misalign strategies with shareholder inter- ests. Earlier research findings suggest that the extent of board involvement and control in strategic issues varies substantially among firms (Johnson, Hoskisson, & Hitt, 1993; Judge & Zeithaml, 1992). More recent evidence from the special- ized governance and academic literatures, suggests that, over the past decade, shareholder activists have influenced many boards to augment their involvement by evaluating a broader range of strategies (Clyde, 1997; Lear, 1997; Lear & Yavitz, 1997; Lorsch, 1996; Witte, 1997), and in improving the quality of their evaluations (Dobrzynski, 1993b; Gordon, 1994). Some earlier evidence suggests boards may not seriously consider layoff strat- egies or their consequences (Horton, 1991). Unlike strategies such as mergers and anti-takeover provisions, layoffs do not legally require board intervention and approval. In accordance with governance changes instigated by activists, we contend that boards have played a greater role in monitoring managements' lay- off strategies over the past decade. Although limited, the business literature pro- vides anecdotal support for this contention (e.g., Collins, 1993; Heenan, 1993; Morrissey, 1994; Queenan, 1996). Furthermore, layoffs are often part of an inter- nal corporate restructuring or downsizing (Freeman & Cameron, 1993). Over the past decade governance reform activists have successfully pressured boards to become more active monitors of internal corporate restructuring and re-engineer- ing strategies (Nelson, 1995). For example, the boards of General Mills, IBM, Ford Motor Company and L.A. Gear were all active in internal restructuring that involved significant job cuts. Major shareholders such as CalPERS have also become increasingly concerned with "corporate responsibility" and discourage boards from supporting employment policies that seek short term gains ("Corpo- rate Responsibility," 1996). Spring 1999 Pouder & Cantrell: Corporate Governance Reform Governance Elements 51 Given that boards are becoming more vigilant and better informed monitors of managements' layoff strategies, we next consider specific changes sought by shareholder activists in individual governance elements. Board Composition Shareholder activists maintain that boards should be comprised of a majority of outside directors. Boards dominated by inside director-managers are more likely to seek policies aligned with management rather than shareholder interests. This results in agency problems as discussed above. Activists also argue that even outside directors may be favorably biased toward management. As a consequence of the governance reform movement, the Securities Exchange Commission has established guidelines for defining outside directors in Regulation 14A, Item 6(b). Affiliations that negate outsider status are based on past employment in the cor- poration, rel3:tionship by blood or marriage, and certain business transactions con- ducted with the corporation. It is also widely believed by the business press and academics that boards are more effective in protecting shareholder interests when there are greater proportions of unaffiliated directors (see Zahra & Pearce, 1989 for discus- sion; McLaughlin, 1994; Mizruchi, 1983; Schellhardt, 1991). Empirical re- search findings show that higher proportions of outside directors are signifi- cantly associated with protecting shareholder interest in the following strate- gic contexts: removal of incompetent CEOs (Weisbach, 1988); stock market reaction to announcements of poison pills (Brickley, Coles, & Terry, 1994); stock market reaction to acquisition announcements (Brickley & James, 1987); and, boards sued for failing to meet their responsibilities to shareholders (Kesner & Johnson, 1990). Other studies fail to show significant associations in the following settings: failed retail firms (Chaganti, Mahajan, & Sharma, 1985); entrepreneurial firms (Daily & Dalton, 1992); stock market reaction to anti takeover provisions (Sundaramurthy, Mahoney, & Mahoney, 1997); and level of CEO power (Daily & Johnson, 1997). Board Leadership Agency problems may develop when the chairperson also serves as CEO. Dual CEO/chairperson positions are likely to be viewed as more prominent and influential by board members. This confers an image of power that may hinder the board's ability to monitor independently (Beatty & Zajac, 1994) and intro- duces a pro-management board orientation (Lorsch, 1989). Alternately, separa- tion of chairperson and CEO promotes the interest of shareholders through inde- pendent evaluation of the CEO and management and by introducing issues that directly affect shareholders (Sundaramurthy & Rechner, 1997). As in research on director independence, empirical findings that explore the link between dual chair- 52 Journal of Business Strategies VoL 16, No.1 person/CEO are mixed (cf., Baliga, Moyer, & Rao, 1996; Beatty & Zajac, 1994; Chaganti, Mahajan, & Sharma, 1985; Daily & Dalton, 1997; Rechner & Dalton, 1991). Director Stock Incentives Perfonnance-based incentives for directors is another important governance element in the shareholder activist movement. Agency theorists argue that stock ownership by directors provides an incentive to improve their effectiveness in monitoring managers' decisions because they have a greater personal stake in the wealth effects of those decisions (Jensen & Meckling, 1976). In line with this prediction, governance refonners have influenced corporations to increase direc- tor stock ownership as an attempt to better align shareholder and managerial in- terests (McLaughlin, 1994). Equity ownership encourages inside and outside di- rectors to protect the interests of shareholders because these directors benefit from higher finn perfonnance (Westphal & Zajac, 1995). In addition, directors increase their voting rights in proportion to their equity ownership, thereby bringing their interests into even closer alignment with shareholders (Zald, 1969). Some em- pirical studies on equity ownership by directors find that such incentives act to increase the board's monitoring of management, resulting in the choice of strate- gies that increase shareholder wealth (e.g., Hoskisson, lohnson, & Moesel, 1994; Mallette & Fowler, 1992; Rediker & Seth, 1995; Westphal & Zajac, 1995). Other empirical research fails to support the views espoused by agency theory and share- holder activists (e.g. Byrd & Hickman, 1992; Kosnik, 1987; Sundaramurthy et aI., 1997). Stock Ownership by Institutional Investors Individual investors owning few shares exercise low control over potential agency problems because they have limited voting power and cannot economi- cally obtain infonnation about managements' activities. The consolidation of ex- ternal ownership. mainly by institutional investors, has both increased voting power and facilitated cost-effective collection of infonnation on board activities. Large shareholders are better able to pressure boards to ratify strategies that serve their interests. Unsurprisingly, as ownership of stock by institutions has grown from about 9% in 1970 to over 50% in 1996 (Chaganti & Damanpour, 1991; Sundaramurthy & Rechner, 1997), institutions have become a dominant force in the governance refonn movement (Byrne, 1997; Pound, 1992). Because institutional investors often hold a large number of shares, they can- not easily shift their investments to other companies; they therefore will seek a more active role in the choice of a finn's strategies (Changanti & Damanpour, 1991; Davis & Thompson, 1994). This suggests that when finns announcing a layoff have a high proportion of institutional ownership, there is a greater likeli- hood that their boards have considered shareholder interests in ratifying management's layoff strategy. Although there is some research and anecdotal Spring 1999 Pouder & Cantrell: Corporate Governance Reform 53 evidence linking greater institutional ownership to improved monitoring, most research studies show insignificant findings (cf., Chaganti & Damanpour, 1991; Dobrzynski, 1997a; Graves, 1988; Mallette & Fowler, 1992; Sundaramurthy, 1996; Sundaramurthy et aI., 1997). Governance Practice and Stock Market Response Is governance reform related to the choice of layoff strategies that im- prove performance? Activists would contend that layoff strategies in firms whose boards are involved and effective monitors of management are more likely to improve performance than layoff strategies in firms whose boards are not involved and effective monitors of management. To test this idea, we measure performance using abnormal returns associated with the stock market's reaction to a layoff announcement. In announced stock market events perfor- mance is measured by stock market anticipation of value rather than post hoc accounting data. (Lubatkin & Shrieves, 1986). This implies that the stock market is aware of a firm's governance and its performance implications when the firm announces a layoff. For the following reasons, we assume that stock returns associated with a layoff announcement would be expected to incorporate the future costs or ben- efits ascribed to a firm's governance practices. First, a central tenet of financial economics is that efficient markets capture all publicly available information (Fama, 1976). If investors consider a firm's governance practices in assessing its layoff announcement, then the abnormal returns associated with the layoff should be related to the firm's governance practices. Second, a steady stream of evidence from the business press, including regularly published rankings of firms' gover- nance practices, tend to make governance practices and issues highly visible (Byrne, 1997; Heenan, 1993). Third, institutional shareholders are majority share- holders in many corporations. These shareholders have much at stake, making them highly visible to the stock market (Brickley, Lease, & Smith, 1994). Finally, the following event studies show that the market can view, and is influenced by each governance element: board composition (Brickley, Coles, & Terry, 1994; Hermalin & Weisbach, 1988; Lubatkin, Chung, Rogers, & Owers, 1989; Rosenstein & Wyatt, 1990); director stock ownership (Brickley, Lease, & Smith, 1988; McWilliams, 1990; Stulz, 1988); and dual versus separate CEO and chair posi- tions (Sundaramurthy, et aI., 1997). The foregoing suggests that the stock market should perceive good gover- nance practices in firms. Accordingly, layoff announcements in such firms would be valued higher than layoff announcements in firms that do not subscribe to good governance practices. From a managers' perspective, positive or negative stock market reactions to the firm's layoff strategy should signal that a good or poor governance practice is in place, respectively. This leads to the following hypothesis: 54 Journal of Business Strategies Vol. 16, No.1 Hypothesis 1: Corporate governance practices are significantly related to positive and negative changes in shareholder value following a layoff announcement. Besides the overall effect of governance practices on shareholder value, man- agers would be interested to know the impact of individual governance elements on firm performance. As previously discussed, research findings in support of an agency theory approach to corporate governance are ambivalent. We therefore set up the following null hypotheses to test the effects of each governance element on performance: Hypothesis 2: Announcement effects of board composition on shareholder value will be zero. Hypothesis 3: Announcement effects of dual CEO and chair- man positions versus separate CEO and chairman positions on shareholder value will be zero. Hypothesis 4: Announcement effects of director stock owner- ship on shareholder value will be zero. Hypothesis 5: Announcement effects of institutional stock own- ership on shareholder value will be zero. Method Sample An event study methodology provides measures of abnormal stock mar- ket returns (see Brown & Warner, 1985, for a comprehensive explanation of event study methodology). As a first step, we reviewed the Wall Street Jour- nal Index for announcements of layoffs during the 1989-1993 time period. We eliminated announcements of layoffs in the auto, airline, and defense con- tractor industries. Layoffs in these industries tend to follow a regular and some- what predictable pattern, which could dampen market reaction to the announce- ment (McWilliams & Siegel, 1997). We also eliminated announcements of layoffs that may have been confounded by other significant events such as changes in key executives, plant closings, changes in dividend policy, an- nouncements of mergers, and changes in earnings. We dropped firms that had filed for bankruptcy protection. In all, we eliminated 91 announcements from an original total of 222 announcements, resulting in a final sample size of 131 announcements for 102 firms. The Appendix lists firms in the sample and their corresponding layoff announcement dates. Spring 1999 Pouder & Cantrell: Corporate Governance Reform 55 Measures An event study uses the "market model," which proposes a relation between the return on a stock, over a given period of time, and the return on the market portfolio over the same time period (Brown & Warner, 1985). This infonnation and all other stock information used in our study was obtained from the Center for Research in Security Prices University of Chicago (CRSP) tapes. We esti- mated the market model using one trading year of daily returns (from 331 to 91 days before the announcement). The two-day time period of the announcement date and previous day (t-l, t=O) showed the greatest cumulative abnormal returns (CARs). For this reason, and because short time periods are more likely to ex- clude confounding events than long windows (McWilliams & Siegel, 1997), this two day period serves as the event window from which we compute our depen- dent variable. This research tests if governance practice can accurately predict a positive or negative market return in response to a layoff announcement. The dependent vari- able is therefore dichotomous, coded as a "1" for positive CARs and "0" for negative CARs (no CAR had a value of zero). Four independent variables used in the analysis are proportion of outside directors, separation of CEO and chairperson, proportion of common shares held by all directors, and proportion of common shares held by institutional investors. Information on the first three variables comes from proxy statements for the year prior to the layoff announcement. We define outside directors consistent with SEC Regulation 14A, Item 6(b). Shares held by institutional investors comes from the Value Line Investment Survey for the reporting date that most closely pre- cedes the layoff announcement. We include three control variables. The stock market reaction to a layoff announcement may be influenced by the size of the layoff (Worrell, Davidson, & Sharma, 1991), which we measure as the percentage ofthe work force targeted for a layoff. We also suspect that the finn's size and profitability influence the market reaction to a layoff announcement. Larger and more profitable finns are more visible, and therefore likely to be subject to greater scrutiny. We use the finn's sales for the year before the layoff to measure size. To control for a firm's profitability, we use return on equity for the year prior to the layoff announce- ment. Statistical Model One of our interests is to see if overall governance practice can predict posi- tive and negative abnormal returns. A second interest is to see if individual gover- nance elements are significantly related to positive and negative abnonnal re- turns. Because the dependent variable is dichotomous and our hypotheses require testing the signs of individual variables, we use logistic regression to analyze the data. A logistic regression model also has the following advantages: its regression coefficients are easy to interpret; it can compensate for the distorting effects of 56 Journal of Business Strategies Vol. 16, No.1 unequal proportions of dependent variables by allowing specification of the pro- portion of firms having positive and negative abnormal returns; it estimates the proportion of dependent variables correctly classified, and it can accommodate dichotomous independent variables (e.g., separate and dual CEO/chairperson). Results Table 1 presents means, standard deviations and intercorrelations. There are no excessively high correlations (r> .70), indicating that multicollinearity is not likely to be a problem. Consistent with previous research, the average proportion of institutional ownership is 53.0% and 78.0% of CEOs also serve as chairperson of the board. The average percentage of employees that a firm expected to layoff was 6.5%. The average percentage of outside directors on boards was 61.0% and directors held 3.0% of outstanding common shares. Table 1 Means, Standard Deviations, and Intercorrelations of Variables Variables Mean S.D. 2 3 4 5 6 7 1. Cumulative Abnormal Returns (t::·I, t=O) 0.44 0.50 2. CEO/Chairperson Separation 0.78 0.42 .06 3. Proportion of Outside Directors 0.61 0.17 .15 .15 4. Proportion of Institutional Ownership 0.53 0.16 .27** -.02 .18* 5. Proportion of Shares Held by Directorsa 75.73 221.00 -.17 -.19* -,37* -,11 6. Percentage Layoff Announced 6.48 5.70 -.01 .03 ,08 -.17 .12 7. Return on Equity 0.03 0.32 .10 .13 .23** .30** -.30* -.16 8. Salesb 11.10 1698 .27** .19* .18* .18* -.57**-.36··.17 N=131 a Porportion of shares held by directors transformed to its natural logarithm. b Expressed in millions of dollars. transformed to natural logarithm in the logistic regression. "'p < .05 up < .01 Table 2 presents the proportion of negative and positive CARs, and the pro- portion of correctly classified CARs for the logistic regression model (adjusted for the probability of observed outcomes). The model correctly classifies 69.5% of the 13 I abnormal returns associated with a layoff announcement (67.6% of negative CARS and 7 1.9% of positive CARs are classified correctly, respectively). Spring 1999 Pouder & Cantrell: Corporate Governance Reform Table 2 Classification Results for Logistic Regression Modelab 57 Observed Abnormal Predicted Negative Returns Abnormal Returns Predicted Positive Abnormal Returns Total Count Percent Negative Positive Negative Positive 50 16 67.6 28.1 24 41 32.4 71.9 74 57 100.0 100.0 a Percentage correctly classified 69.5% b Adjusted for proportion of positive and negative abnonnal returns (44.0% and 56.0%, respec- tively) Table 3 reports the logistic regression analysis, which addresses the relation· ship between governance elements and change in shareholder value following a layoff announcement. As indicated by the value of chi·square, the model has a high goodness of fit (p < .01), suggesting that corporate governance practices are significantly related to positive and negative changes in shareholder value fol- lowing a layoff announcement as proposed in Hypothesis 1. Table 3 also reveals that institutional investor stock ownership is a significant, positive predictor of changes in market returns (p slightly greater than .01) following a layoff announce- ment. However, no other governance element is significantly related to market returns following a layoff announcement. Sales, used as a measure of firm size, is a highly significant and positive predictor of changes in shareholder value. Conclusion and Implications Academic and practitioner support for governance reform has grown steadily over the past two decades. Despite research and anecdotal evidence that some governance practices are associated with improved firm performance, an unan- swered question is whether positive or negative performance effects can be pre- dicted from attempts to improve governance. Our findings suggest that four gov· ernance practices collectively can accurately predict positive or negative abnor- mal stock returns for about 70% of the cases in this study. Whether the net effect of governance practices advocated by activists actually improves governance or is just perceived as protecting shareholder interests, the logistic regression shows that, overall, the market reaction is significantly related to governance practice. 58 Journal of Business Strategies Vol. 16, No.1 Table 3 Logistic Regression Analysis Market Reaction to Layoff Announcements, Governance and Control Variables Standard Wald Variable Coefficient Error Statistic P-value CEO/Chairperson Separation -.0197 .4873 .0016 .9678 Proportion of Outside Directors .8375 1.2724 .4332 .5104 Proportion of Institutional Ownership 3.5693 1.3874 6.6181 .0101 Proportion of Shares Held by Directorsa .0311 .1234 .0637 .8007 Percentage Layoff Announced .0537 .0395 1.8501 .1738 Return on Equity .0812 .7654 .OIl3 .9155 Salesa .4310 .1694 6.4741 .0109 Constant -6.7218 2.0628 10.6179 .0011 N=131, -2 Log Likelihood =158.871, Chi Square =20.571, 7 df. P =.0045. a Transfonned to natural logarithm value. The logistic regression also shows that the model's significance stems largely from the positive effect of institutional shareholdings on stock market reaction. This empirical finding supports expectations of agency theory and shareholder activists. However, none of the other three governance practices is significantly associated with market reaction to layoff announcements. This pattern of results suggests that the market perceives greater proportions of institutional investment to be most closely associated with good governance practice. At the same time, internal governance elements (i.e., greater proportions of outside directors, sepa- ration of CEO and chairperson, and higher levels of director stock ownership) appear to have little effect on determining whether the market reacts negatively or positively to layoff announcements. The following may explain this pattern of results. Institutional investors represent a large proportion of shareholder activ- ists and own a majority of shares in most large corporations. Accordingly, when institutions own a greater proportion of shares in a corporation they may signal to the market a stronger likelihood that their influence will improve internal moni- toring and choice oflayoff strategies, regardless of whether recommended inter- nal governance practices have been adopted. As Pfeffer (1981) suggests, the board may be symbolically signaling its governance role. These results have several implications. First, there is overall support for the idea that firms having better governance tend to be better performers. Better gov- ernance can be largely attributed to concentration of ownership by institutional investors. Consequently, managers contemplating layoffs should look at the level of institutional shareholdings in their firms to help make more informed deci- sions concerning whether layoffs will increase or decrease shareholder value. Second, in the context of layoffs, it appears that other acceptable governance practices have less influence on performance than agency theory and activists Spring 1999 Pouder & Cantrell: Corporate Governance Reform 59 would predict. This is consistent with research findings in other contexts and implies that multiple conceptual approaches are needed to better explain corpo- rate governance (for example, see Daily et aI., 1998). These results should be interpreted with caution. Findings of insignificant perfonnance effects associated with internal governance elements may indicate that the market does not perceive the board to playa key role in monitoring and ratifying layoff strategies. Future research in corporate governance needs to in- vestigate the extent of board involvement in layoff strategies. Research methods in this area could include interviews and surveys targeted for directors and CEOs. Finally, the event study methodology implicitly assumes that the market can evalu- ate the full benefits of governance practices. A timely and useful follow-up to this study would test the long tenn implications of governance on layoffs using ac- counting-based perfonnance measures. References Baliga, B. R., Moyer, R. c., & Rao, R. S. (1996). CEO duality and firm performance: What's the fuss? Strategic Management Journal. 17, 1-43. Beatty, R., & Zajac, E. (1994). Managerial incentives, monitoring, and risk bearing: A study of executive compensation, ownership, and board structure in initial public offerings Administrative Science Ouarterly. 39, 313-335. Brickley, J. A., & James, C. M. (1987). The takeover market, corporate board composi- tion, and ownership structure: The case of banking. Journal of Law and Economics. ~, 161-180. Brickley, J. A., Coles, J. L., & Terry, R. L. (1994). Outside directors and the adoption of poison pills. Journal of Financial Economics. 35, 371-390. Brickley, J. A., Lease, R. C., & Smith, C. W. (1988). Ownership structure and voting on antitakeover amendments. Journal of Corporate Finance. 1, 5-31. Brown, S., & Warner, J. (1985). Using daily stock returns: The case of event studies. Journal of Financial Economics. 14, 3-31. Byrd, J. w., & Hickman, J. A. (1992). Do outside directors monitor managers? Journal of Fjnancial Economics. 32, 195-221. Byrne, J. A., (1997, September 15). The CEO and the board. Business Week, 106-116. Chaganti, R. S., Mahajan, Y., & Sharma, S. (1985). Corporate board size, composition and corporate failures in retailing industry. Journal of Management Studies. 22, 400- 417. 60 Journal of Business Strategies Vol. 16, No.1 Chaganti, R. S., & Damanpour, F. (1991). Institutional ownership, capital structure, and firm performance. Strategic Manai:ement JournaI..J2, 479-491. Clyde, P. (1997). Do institutional shareholders police management? Managerial aug De- cision Economics, 18, 1-10. Collins, T. (1993, April 29). Stetson group to keep Norwich Group intact. Computer Weekly. I. Daily, C. M., & Dalton, D. R. (l992). The relationship between governance structure and corporate performance in entrepreneurial firms Journal of Business Venturing.,.], 375-386. Daily, C. M., & Dalton, D. R. (1997). CEO and board chair roles held jointly or sepa- rately: Much ado about nothing? Academy of Management Executive. 11 (3), 11-20. Daily, C. M., & Johnson, J. L. (1997). Sources of CEO power and firm financial perfor- mance: A longitudinal assessment. Journal of Manai:ement. 23, 97-117. Dalton, D. R., Daily, C. M., Ellstrand, A. E., & Johnson J. L. (998). Meta-analytic re- views of board composition, leadership structure, and financial performance. Strate- 2ic Management Journal. 19, 269-290. Davis, G. E, & Thompson, T. (1994). A social movement perspective on corporate con- troL Administrative Science Ouarterly. 39, 141-173. Dobrzynski, 1. H. (1997a, February 11). A top-ten few companies care to be on. New York Times, C3: 3. Dobrzynski, J. H. (1997b, March 7). Big investors train their fire on nonperforming direc- tors. New York Times, C6: 1. Fama, E. F. (1976). Foundations of Finance. New York: Basic Books. Fama, E. E, & Jensen, M. C. (1983). Separation of ownership and control. Journal of Law and Economics. 26, 327-349. Freeman, S. J., & Cameron, K. (1993). Organizational downsiZing: A convergence and reorientation framework. Organization Science, 4, 10-29. Gordon, J. N. (1994). Institutions as relations investors: A new look at cumulative voting. Columbia Law Review. 94, 124-192. Graves, S. B. (1988). Institutional ownership and corporate R&D in the computer indus- try. Academy of Management Journal, 31, 417-428. Harrison, J. R. (1987). The strategic use of corporate board committees. California Man- agement Review, 30 (l), 109-125. Spring 1999 Pouder & Cantrell: Corporate Governance Reform Heenan, D. A. (1993, October). Reformation redux. Chief Executive (U.S.l, 50-53. 61 Hermalin, B., & Weisbach, M. S. (1988). The determinants of board composition. Rillld Journal of Economics, 19, 589-606. Horton, T. R. (1991). Human resources in the boardroom. Management Review, 80 (3), 1-3. Hoskisson, R. E., Johnson, R. A., & Moesel, D. D. (1994). Corporate divestiture intensity in restructuring firms: Effects of governance, strategy, and performance. Academy of Management Journal. 37, 1207-1251. Jensen, M. C, & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics. 3, 305-360. Johnson, R. A., Hoskisson, R. E., & Hitt, M. A. (1993). Board of director involvement in restructuring: The effects of board versus management controls and characteristics. Strategic Management Journal. 14, 33-50. Judge, W. Q., & Zeithaml, C P. (1992). Institutional and strategic choice perspectives on board involvement in the strategic decision process. Academy of Management Jour- nal. 35, 766-794. Kesner, I. F.,& Johnson, R. B. (1990). An investigation of the relationship between board composition and stockholder suits. Strategic Management Journal. 11,327-345. Kosnik, R. (1987). Greenmail: A study of board performance in corporate governance. Administrative Science Ouarterly. 32, 163-185. Lear, R. W (1997, August). Twenty years of corporate governance. Chief Executive, 16-19. Lear, R. W, & Yavitz, B. (1997, October). Hanging by a thread. Chief Executive, 46-51. Lee, P. W. (1997). A comparative analysis of layoff announcements and stock price reac- tions in the United States and Japan. Strategic Management Journal. 18, 879-894. Lorsch, J. W. (1989). Pawns or potentates: The reality of America's comorate boards. Boston: Harvard Business School Press. Lorsch,1. W (1996 July-August). The board as a change agent. Comorate Board, 1-6. Lubatkin, M. H., & Shrieves, R. E. (1986). Towards reconciliation of market performance measures to strategic management research. Academy of Management Review. II, 497-512. Lubatkin, M. H., Chung, K. H., Rogers, R. C, & Owers, J. E. (1989). Stockholder reac- tions to CEO changes in large corporations. Academy of Management Journal. 32, 47-68. 62 Journal of Business Strategies Vol. 16, No.1 Mallette, P., & Fowler, K. L. (1992). Effects of board composition and stock ownership on the adoption of "poison pills." Academy ofMana~ementJournal. 35,1010-1035. McLaughlin, D. 1. (1994). The director's stake in the enterprise. Directors & Boards. 18 (2),53-60. McWilliams, A., & Siegel, D. (1997). Event studies in management research: Theoretical and empirical issues. Academy of Mana2ement Journal. 40, 626-657. McWilliams, V. B. (1990). Managerial share ownership and the stock price effects of anti takeover amendment proposals. Journal of Finance. 45, 1627-1640. Mizruchi, M. (1983). Who controls whom? An examination of the relations between man- agement and the board of directors in large American corporations. Academy of Man- a~ement Review. 8, 426-435. Morrissey, J. (1994). Quarterdeck CEO resigns over drastic cost-cutting. PC Week. II (34),109-110. Nelson, C. A. (1995, May-June). The challenge of restructuring. Corporate Board, 20-23. Pfeffer, J. (1981). Management as symbolic action: The creation and maintenance of or- ganizational paradigms. In L .L. Cummings and B. M. Staw (Eds.), Research in Or- ianizational Behavior (Vol. 3), Greenwich, CT: JAI Press, I-52. Pound, J. (1992). Beyond takeovers: Politics comes to corporate control. Harvard Busi- ness Review. 70, 83-93. Queenan, J. (1996, November). Getting (virtually) real. Chief Executive, 70. Rechner, P. L., & Dalton, D. R. (1991). CEO duality and organizational performance: A longitudinal analysis. Strate~ic Mana~ement Journal. 12, 155-160. Rediker, K. 1., & Seth, A. (1995). Boards of directors and substitution effects of alterna- tive governance mechanisms. Strate~ic Manaiement Journal. 16,85-99. Corporate responsibility and the board. (1996, September-October). COUJOrate Board, 1-3. Rosenstein, S., & Wyatt, J. (1990). Outside directors, board independence, and share- holder wealth. Journal of Financial Economics. 26, 175-192. Schellhardt, T. D. (1991, March 20). More directors are recruited from outside. Wall Street .lID.!rlli!l, B 1. Stulz, R. (1988). Managerial control of voting rights: Financing policies and the market for corporate control. Journal of Financial Economics. 20, 25-54. Spring 1999 Pouder & Cantrell: Corporate Governance Reform 63 Sundaramurthy, C. (l996). Corporate governance within the context of anti takeover pro- visions. Stratee;ic Mana~ment Journal. 15,377-394. Sundaramurthy, C., & Rechner, P. L. (1997). Conflicting shareholder interest: An empiri- cal analysis of fair price provisions. Business and Society. 36, 73-88. Sundaramurthy, C., Mahoney, J. M., & Mahoney, J. T. (1997). Board structure, anti takeover provisions, and stockholder wealth. Strate&ic Mana~ement Journal. 18, 231-245. Weisbach, M. S. (1988). Outside directors and CEO turnover. Journal of Financial Eco- nomics. 20, 431-460. Westphal, J. D., & Zajac, E. (1995). Who shall govern? CEO/board power, demographic similarity, and new director selection. Administrative Science Quarterly. 40. 60-83. Witte, D. L. (1997, May-June). The board as a strategy-setting force. Corporate Board. 10-15. Worrell, D. L., Davidson, W. N., & Sharma, V. M. (1991). Layoff announcements and stockholder wealth. Academy of Management Journal. 34, 662-678. Zahra, S. A., & Pearce, J. A. (1989). Boards of directors and corporate financial perfor- mance: A review and integrative model. Journal of Management, 15, 291-334. Zald, M. (1969). The power and function of boards of directors; A theoretical synthesis. American Journal of Sociology. 73, 261-272. Endnotes Recent studies show that both positive and negative abnormal stock market returns occur in response to layoff announcements (Lee, 1997; Worrell, Davidson, & Sharma, 1991). 64 Journal of Business Strategies Appendix Sample Firms and Layoff Announcement Dates Vol. 16, No.1 Company Name ACUSON CORP ADVANCED MICRO DEVICES INC AETNA LIFE & CASUALTY CO ALEX BROWN INC AMAXCORP AMDAHL CORP AMDAHL CORP AMERICAN EXPRESS CO AMERICAN TELEPHONE & TELEG CO APPLE COMPUTER INC APPLIED MAGNETICS CORP APPLIED MATERIALS INC ATLANTIC RICHFIELD CO AVON PRODUCTS INC BAXTER INTERNATIONAL INC BAXTER INTERNATIONAL INC BECKMAN INSTRUMENTS INC NEW BELL ATLANTIC CORP BELL ATLANTIC CORP BELLSOUTH CORP BLOUNT INC BORDEN CO BORDEN CO BORLAND INTERNATIONAL INC BRUNSWICK CORP BRUNSWICK CORP BURR BROWN CORP BUSINESSLAND INC CR S S INC CAROLINA POWER & LIGHT CO CENTERIOR ENERGY CORP CINCINNATI & SUBN BELL TEL CINCINNATI GAS & ELEC CO COMMONWEALTH EDISON CO COMMONWEALTH EDISON CO COMPAQ COMPUTER CORP CONNER PERIPHERALS INC CRAY RESEARCH INC CYPRUS MINERALS CO CYPRUS MINERALS CO CYTOGEN CORP D S C COMMUNICATIONS CORP DATA GENERAL CORP DATA GENERAL CORP Announcement Date 06/03/93 11116190 06/30/92 11/28/90 06121190 10/13/92 04123/93 03/01/90 03/04/92 01116190 07119193 11116/90 08126191 04/17192 04/05/90 1lJ 17/93 10119193 09115/89 07/10/92 IlJ09/92 01/17/89 09129189 01113/92 12/10/92 07120/89 07/09/90 03119/92 01111/90 08/20/92 08/29/89 03/24/93 12/09/92 07123192 01123/89 07/23/92 10/08/92 10122/93 10/03/89 03/12192 07/08/93 09/20193 08/05/91 10/11189 04/02/92 Spring 1999 Pouder & Cantrell: Corporate Governance Reform 65 DAYTON HUDSON CORP DAYTON HUDSON CORP DENNISON MANUFACTURING CO DIGITAL EQUIPMENT CORP DUN & BRADSTREET INC DUN & BRADSTREET INC FIRST FIDELITY BANCORP FLEET NOR STAR FINANCIAL GRP INC FLORIDA POWER & LIGHT GENERAL ELECTRIC CO GENERAL ELECTRIC CO GERBER PRODUCTS CO GOODYEAR TIRE & RUBBER CO HARLEY DAVIDSON INC HARRIS CORP HASBRO INDUSTRIES INC ILLINOVA CORP HOLDING CO INTEL CORP INTERNATIONAL BUSINESS MACHS COR INTERNATIONAL BUSINESS MACHS COR INTERNATIONAL BUSINESS MACHS COR INTERNATIONAL BUSINESS MACHS COR INTERNATIONAL BUSINESS MACHS COR IOMEGA CORP KEY TRONICS CORP LOTUS DEVELOPMENT CORP LOUISVILLE GAS & ELEC CO M A I SYSTEMS CORP MACDERMID INC MAGMA COPPER CO NEW MCGRAW HILL PUBLISHING INC MEAD CORP MERCK & CO INC MIDLANTIC CORP MOBIL OIL CORP MONSANTO CHEMICAL CO MONSANTO CHEMICAL CO NATIONAL SEMICONDUCTOR CORP NIAGARA MOHAWK POWER CORP NIAGARA MOHAWK POWER CORP NYNEXCORP NYNEXCORP OCCIDENTAL PETROLEUM CORP ORYX ENERGY CO PENNEY J C INC PEPSICO INC PFIZER CHAS & CO INC PHILIP MORRIS & CO LTD PHILIP MORRIS & CO LTD 06126/90 03/10/92 12/15/89 04/27/92 12/01192 11/01193 03/06/90 12/07/90 10125193 01/25/90 02/26/92 01114192 03114/91 09/24/90 04/06/92 05/30/91 04/04/89 04/27/90 12/05/89 12/07/90 03/28/91 07/29/92 02111/93 02117/93 08/30/91 08/06/90 11/07/89 04111191 06/27/91 10111193 12/06/89 07/03/92 03124193 05/01/92 03119/92 07/01/91 11123192 01117/89 09120/90 02/03/93 09117191 12/02/93 02114191 10115/91 0911 1/92 02104/92 10120193 05/06/92 11/26193 66 Journal of Business Strategies Vol. 16, No. 1 PHILLIPS PETROLEUM CO PITNEY BOWES INC PORTLAND GENERAL ELECTRIC CO RAYTHEON MANUFACTURING CO SCOTT PAPER CO SEARS ROEBUCK & CO SEARS ROEBUCK & CO SEQUENT COMPUTER SYSTEMS INC SHAWMUT NATIONAL CORP TAMBRANDS INC TEKTRONIX INC TENNECO INC TENNECO INC TEXAS INSTRUMENTS INC TEXAS INSTRUMENTS INC TEXAS INSTRUMENTS INC TEXAS UTILITIES CO TRAVELERS CORP TRINOVA CORP U SF & G CORP U SF&GCORP UNION CARBIDE & CARBON CORP UNISYS CORP UNITED STATES SHOE CORP UNITED STATES SHOE CORP UNITED TECHNOLOGIES CORP UNOCALCORP VARIAN ASSOC WAL MART STORES INC WANG LABORATORIES INC WANG LABORATORIES INC WANG LABORATORIES INC WANG LABORATORIES INC WANG LABORATORIES INC WARNER LAMBERT CO XEROX CORP XEROX CORP XEROX CORP 02/19/92 12113/89 08/12/91 1lI01l93 01124/92 09/17190 01l26/93 07/03/91 01124/91 12/14/89 05/30/90 10123/91 12/05/91 11I21189 07/19/91 02102/93 06/02/92 01125/89 10119/89 01/17/91 04/06/91 09126/91 02/21189 01129/91 01129/92 08/03/90 04128/92 05/15/90 10122191 04117189 11I03/89 04/27/90 01117/91 07/01191 11124/93 02/01/89 12112/91 12/09/93 Richard W. Pouder is Assistant Professor of Management at Clemson University. He received his Ph.D. at the University of Connecticut. His research applies different conceptual perspectives to areas in strategic management such as technology. innovation, and restructuring. R. Stephen Cantrell is Professor of Management and Economics at Clemson Univer- sity. He received his Ph.D. in Economics and Statistics from North Carolina State University. His research interests include applied statistics, econometric aspects of business management, applied financial economics and strategic management issues in capital markets. Corporate Governance Reform: Influence on Shareholder Wealth